The proposed Clean Energy Target would operate similarly
to the existing RET Scheme.

Earlier this month the review panel appointed by the COAG Energy
Council and led by Chief Scientist Alan Finkel released its report
on the national energy market (NEM).
Blueprint for the Future: Independent Review into the Future
Security of the National Electricity Market contains a wide
range of recommendations to achieve the key outcomes of increased
security, future reliability, rewarding consumers and lower
emissions. In the first of our articles on the recommendations of
the Finkel Report, we will focus on the Review Panel's
recommendations that:

a Clean Energy Target (CET) be introduced as
the preferred policy option for reducing emissions from the NEM;
and

the existing Renewable Energy Target Scheme (RET
Scheme) remain unchanged to the end of its design life in
2030, but not be extended beyond that date in its current
form.

Background to the Finkel Report

The Finkel Report was commissioned by COAG in 2016 to address
concerns about the security and reliability of the NEM in the
context of a decade-long period of uncertainty around emissions
reduction policies in Australia which is widely held to have:

pushed up electricity prices by hindering investment in new
infrastructure; and

undermined the reliability of electricity supply as a result of
new generation technologies being connected to a system that was
not designed for them.

The NEM is the interconnected electricity market operating in
Queensland, NSW, Victoria, the ACT, South Australia and Tasmania.
It was developed at a time when electricity was almost entirely
generated by coal, gas and hydro, rather than by intermittent
generation sources such as wind and solar. Electricity generated in
the NEM produces 35% of Australia's greenhouse gases.

Why a CET?

The Finkel Report found that both an Emissions Intensity Scheme
(EIS) and a technology-neutral CET would achieve
the desired reduction in emissions from the NEM, and favoured a CET
in light of the fact that the Federal Government has previously
ruled out implementing an EIS. Based on modelling undertaken by
the Finkel Review, the CET produced better price outcomes than both
the EIS and business as usual scenarios, and is capable of
delivering Australia's emissions reductions target.

The CET model adopted for the purposes of the review was
calibrated to an emissions reduction target of 28% on 2005 levels
by 2030, with a linear trajectory to zero emissions by 2070. The
design of any CET implemented by the Government may not conform to
those parameters. The effectiveness and impact of any CET scheme
will depend on the ambition of the Federal Government's
emissions intensity threshold.

The proposed CET would aim to incentivise investment in new
low-emissions electricity generators without imposing any penalties
on existing coal-fired generators (to avoid prematurely displacing
them from the NEM). However, the Finkel Report acknowledges that
additional measures must be implemented to ensure security of the
NEM in light of the fact that older generators are reaching the end
of their life and generation from new renewable generators is
variable, presenting challenges for the capacity of the NEM to
respond to electricity demand on call.

At this early stage there appears to be tentative support for a
CET from both sides of politics, as well as from industry
participants, with the main debate being over the role of new coal
fired generation. However, political consensus on Australia's
emissions reductions target will be key to the effectiveness and
longevity of the scheme. It is expected that the findings in the
Finkel Report will in part inform the outcome of the Australian
Government's
review of Australia's climate change policies, which is due
to conclude by the end of 2017.

CET in the context of Finkel's key recommendations

The Finkel Report encourages the Australian Government to
deliver a strategic energy plan focusing on an orderly transition
to an NEM with greater penetration of renewable energy, system
planning and stronger governance. The plan would include:

a credible and enduring emissions reduction mechanism (ie. a
CET) supported by a long-term emissions reduction trajectory for
the electricity sector;

security measures such as the planned retirement of large
generators, back-up power supplies and last resort powers for the
regulator; and

a newly formed Energy Security Board, comprised of an
independent chair and vice-chair, as well as the heads of the three
governing bodies, charged with implementing the review's
recommendations and monitoring the market transition to renewable
energy.

What would a CET look like?

The proposed CET would operate similarly to the existing RET
Scheme and have the following features:

all fuel types, including coal with carbon capture and storage
or gas, would be eligible for the scheme provided they meet or are
below the specified emissions intensity threshold;

eligible generators would receive certificates for the
electricity they produce in proportion to how far their emissions
intensity is below the specified threshold; and

electricity retailers would be obliged to purchase those
certificates to demonstrate that a certain proportion of their
electricity comes from low emissions generators.

If the CET model proposed in the Finkel Report is adopted, new
eligible generators will receive certificates for all electricity
generated, while existing eligible generators will only receive
certificates for any electricity that they produce above their
historic output. The RET Scheme would also be retired in 2020, and
so provisions to prevent renewable generators from benefiting from
both the RET Scheme and the CET would need to be considered.

What else needs to change

The volume of renewable energy in the NEM will continue to
increase (regardless of whether a CET is introduced), in part
because it is now cheaper to build wind and solar generators than
it is to build fossil fuel generators. Finance is not readily
available for new coal/gas generation.

The Finkel Report recognises that the NEM needs to change to
address this to ensure stability and energy security. The CET only
goes part of the way as it will still encourage low emissions
generation which at this time is still predominantly renewable.
Energy storage is identified as an important tool to provide
stability and energy security but this might involve broader NEM
reform as different parts of the energy generation, transmission
and distribution network have different capabilities to deliver
storage opportunities.

Our next article will explore the recommendations of the Finkel
Report in relation to energy storage.

What the Clean Energy Target means for you

Apart from checking the Change in Law clauses of your agreements
to see whether you will bear (or be able to pass through) the costs
of any expenses incurred by generators, retailers and other
affected parties in complying with the CET, the key CET lessons are
likely to be:

For investors: Bipartisan support for the CET
should re-engage investment confidence in investment in the NEM,
and in particular for clean energy sources such as wind, solar and
biomass (as well as energy storage opportunities).

For generators: Fossil fuel power stations
will have a continued role to play in the NEM under the CET,
however, where power stations plan to retire, the CET will require
a structured and planned retreat. The notice provisions of the CET
will in turn facilitate the strategic entry for new low emissions
entrants. Existing low-emissions generators will need to consider
the implications of the possible abolition of the RET Scheme in
2030. Developers of new low-emissions generators should carefully
consider the timing of the construction of any new plant given the
proposed CET is likely to operate on the basis that existing
eligible generators may only receive certificates for any
electricity that they produce above their historic output.

For retailers: Under a CET, retailers will
need to source a certain amount of electricity from clean energy
and will be liable for purchasing certificates to prove it.

Clayton Utz communications are intended to provide
commentary and general information. They should not be relied upon
as legal advice. Formal legal advice should be sought in particular
transactions or on matters of interest arising from this bulletin.
Persons listed may not be admitted in all states and
territories.

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This new Act makes Victoria the first Australian State to reflect its renewable energy targets (VRET) in legislation.

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